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Some states are complaining that the massive expansion of Medicaid under the Patient Protection and Affordable Care Act (aka, ObamaCare) will impose so many new costs and regulations that they are considering opting out of the 45-year-old program.

That would be a big step, one that no state has ever taken. Is it advisable? Not if there is a reasonable way to resolve the current fiscal and regulatory challenges. Is it doable? Probably, but it would mean big changes.

Nearly 50 million Americans rely on Medicaid for their health insurance, disability coverage and long-term care needs. Because the federal government subsidizes between 50 cents and 76 cents of every Medicaid dollar spent, many states have significantly expanded the basic coverage. However, at $340 billion (2008) annual state and federal spending, it is one of the biggest budget items in most states, and growing. And many don’t think they can afford to spend even more.

And yet Medicaid is the worst run health insurance program in the country because, like any government-run health plan, politicians manipulate it—for example, by extorting money from participating drug companies or cutting reimbursements to balance the state budget. Doctors' fees are so low that patients have trouble finding one who will treat them. In addition, Medicaid is riddled with fraud, perhaps between $40 billion and $60 billion a year.

To be sure, Medicaid is a lifeline for the poor who need health coverage, but it’s a very troubled lifeline that must be fixed or abandoned. ObamaCare does neither. Indeed, it exacerbates the current problems by dumping an estimated 16 million more Americans into the program.

Yes, the federal government will temporarily pick up the full costs for the new enrollees, phasing down to 90%—if future budget constraints don’t entice Congress to change its mind. But states still face a number of other new costs, including paying their usual share for those currently eligible for Medicaid who are not enrolled, but who will join when the mandate to have coverage goes into effect in 2014.

States are concerned they will be hard pressed to cover their future Medicaid obligations without cutting education or other important budgets, which is why they’re exploring an opt-out.

The first response for concerned states is to pass legislation asserting that Congress must address the Medicaid problem by 2014—when most of ObamaCare’s new requirements kick in—or threaten to drop out. That would give Washington three years to find a reasonable and affordable solution.

The best solution—and one most states would jump at—is to allow states to choose a block grant for their federal Medicaid allotment, or some portion of it. But the key to making a block grant work is to give the states more flexibility to meet the needs of their citizens.

For example, two years ago Rhode Island sought and received a waiver proposing a capped federal financial obligation for significantly more state flexibility. The state now boasts $150 million in savings in 18 months—a win-win.